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Loan to value ratio (LTV)
Find out more about how your LTV can affect the rates and terms of your next loan.
If you’re looking to take out a mortgage or buy a car, you should know how your loan to value (LTV) ratio might affect your application. Keep reading to find out how to calculate your LTV and why lenders use this number to figure out if you’re eligible to borrow.
What is a loan to value ratio?
A loan to value ratio (LTV) is a simple equation used by lenders to calculate the percentage of your debt against the worth of your assets. They use this number to figure out how much of a property or asset you truly own (vs how much is riding on borrowed money).
When lenders know what percentage of the asset you own, it helps them figure out what level of risk you carry as a borrower. The higher your LTV, the more risk you carry. But don’t worry – even with a high ratio, many lenders will still approve you for a loan if you have good credit and a decent income.
And the good news is that your LTV will go down over time – provided you make your payments consistently and the value of your asset continues to grow.
How to calculate your loan to value ratio
Lenders calculate your LTV by dividing the balance of your loan by the value of the asset you wish to purchase.
Value of Loan / Value of Asset = LTV ratio
Sound complicated? Let’s break it down with a simple example. Say you’re in the market for a new condo and have put in an offer for $200,000. You’ve saved up $40,000 as your down payment, which means you’ll need to borrow $160,000 to cover the outstanding debt.
Using the LTV equation, we’ll divide the balance of the loan ($160,000) by the value of the asset ($200,000), which gives us 0.8. This means your mortgage LTV in this scenario is 80%.
Why should I know my loan to value ratio?
LTVs are typically calculated to determine risk for mortgages, although they can sometimes be used for other assets (like vehicles). Your ratio helps your lender figure out if you’re eligible to borrow. From there, they use it to help them choose how much you can borrow, how long you can take to pay the loan back and what interest rates you’re eligible for.
Lenders may also use your LVR to figure out if you’re in a good position to refinance your mortgage or other large loan if you’ve been paying it off for a while. If you end up going from an LVR of 80% to 60%, for example, your lender might be willing to refinance your loan with better rates or terms.
What is a good LTV?
An LTV of 80% or lower is considered good for most mortgage loans. This magic number will give you the best chance of being approved with favourable rates. It will also allow you to skip out on purchasing mortgage insurance, which most lenders require for LTVs above 80%.
With vehicle loans and large purchase financing, you can often get away with a higher LTV. That being said, lenders may give you better rates on your loan if you have a lower ratio. Depending on the loan and the lender, you may even be able to borrow at more than 100% LTV in some cases.
Personal loan options to consider
If you’re not looking for a mortgage but need to borrow for anything else, personal loans come in all shapes and sizes. A few of the most common types include the following:
- Secured loans. With a secured loan, you have to put up some form of collateral (like your house or vehicle), which your lender has a right to sell if you don’t pay back your loan. Secured loans usually have lower fees and better terms.
- Unsecured loans. Unsecured loans don’t require collateral, but your credit score will go down if you fail to make repayments.
- Guarantor loans. This type of loan requires you to ask a friend or family member to cosign. The only catch is that they’ll be responsible for repayment if you default.
- No credit check loans. Some lenders won’t ask to do a credit check, but they will usually need you to secure your loan with collateral or have a cosigner.
- Payday loans. Payday lenders could be a good solution if you need less than $2,000. Just keep in mind that they charge extremely high interest rates.
Compare personal loans
Understanding your LTV can give you a leg up when it comes to getting better rates and terms on your loan. Find out how lenders use this number to set terms and conditions on the money you borrow, and look into your options for personal loans today to find the best deal.
You can learn more about borrowing with our personal loan guide.
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